In this month’s market review I focus on UK residential property, and what the Monetary Policy Committee’s latest announcements mean for markets. I also take a closer look at the US and European economies, and consider what lies ahead on a global scale.
The Queen’s speech
Earlier this month the Queen gave her address to Parliament, setting out the Government’s agenda for the coming year. Following previous Queen’s speeches, I’ve often been asked which parts investors should pay particular attention to. This year my answer is unusually simple, as on this occasion the address did not include many new proposals at all. Instead, the focus is on Brexit.
It is now time for the Government to prepare for the major legislative challenge of pushing through eight complex bills related to the UK’s planned departure from the European Union (EU) . The amount of detail and the intricacy involved in unravelling decades of EU legislation should not be under-estimated, especially for a minority government, and I think it’s this that will grab most attention over the coming months.
Interest rates split opinion
Leaving Europe aside for a minute, another area to focus on this month is much closer to home. The decision over whether or not to raise interest rates currently seems to be dividing opinion in the Bank of England. The most recent vote saw three out of eight members of the Monetary Policy Committee (MPC) support an immediate rise to keep inflation in check. This is the MPC’s biggest split since 2011 and certainly surprised markets, as it was largely thought that other central banks would lead the way when it came to moving interest rates.
Nevertheless, against a backdrop of higher inflation, it’s understandable that some members of the MPC might want to withdraw the emergency support for the economy which was implemented after the Brexit vote last year.
Currently the UK government bond market is pricing in a 50-50 likelihood that the Bank of England will raise interest rates this November, so the next few speeches from MPC members will be examined with great interest. As ever, the Bank of England’s response will be dependent on data such as economic growth figures, inflation and employment rates. Markets have already priced in some (but not all) of the impact rising interest rates would have. So if the Bank of England does act, we’d expect some further movement in sterling against other currencies.
A drop in the UK residential property market
You may have recently noticed a drop in the UK residential property market. This is because the housing market is coming under pressure from several sources all at once.
First of all, housing is generally expensive compared to wages, which grow slowly. Secondly, the Bank of England has given due warning to the banking system that even if it doesn’t raise interest rates, it will have to take other action to tighten up the supply of credit – this is called macro-prudential regulation. Thirdly, all political parties have expressed their intent to build a significant number of new homes. This will increase the number of houses available in the residential property market, which usually drives prices down.
A more positive outlook for Europe
Looking outside the UK now, June has seen clear movement of investment out of the US and into Europe. Although the US economy continues to grow quite well, investor optimism about a sizeable tax cutting package has receded in recent months. This reflects the difficulty the Trump administration currently has in pushing major legislation through Congress and explains why there has been some movement away from the US.
Europe currently appears an attractive alternative for this investment. The economy is recovering steadily, with lower unemployment supporting consumer spending and many companies benefiting from the upturn in global trade. The election of President Macron in France has also reassured overseas investors about the political situation across Europe. At Standard Life Investments, we have been positive about Europe for some time – but while we remain invested there, we’re watching carefully for when all the good news has been priced in. With that in mind, the real question is: after investment has moved from the US to Europe, where will it move next?
US growth – can it increase?
As I mentioned earlier, the US ecomony is still experiencing growth. The Federal Reserve (the Fed) raised the target range for its overnight interbank lending rate (known as the federal funds rate) from 1% to 1.25% at its June 2017 meeting – a sign that the central bank continues to believe that the US economy is strengthening.
It’s clear the Fed is trying to be very transparent in the marketplace in terms of announcing and then following through with interest rate or balance sheet moves – it doesn’t want to be the cause of greater market volatility. However, as unemployment in the US comes down, the Fed does expect that wages will rise. This will lead it to take action sooner rather than later to limit future inflation and make sure the economic recovery is long lasting.
If you have any questions about your investment strategy, your 1825 Financial Planner will be happy to help.
The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your investment can go up or down, and may be worth less than you paid in. Information is based on our understanding in July 2017.